Episode 235

full
Published on:

26th Sep 2025

Convexity Maven Harley Bassman: How To Survive The Next Rate Cycle

In this episode, Adam Butler is joined by Harley Bassman, Managing Partner at Simplify Asset Management, for a wide-ranging discussion on interest rate volatility, portfolio construction, and public policy. Bassman explains his creation of the MOVE Index before diving into strategies using long-dated options to create asymmetric payoffs. They also explore the systematic risks that challenge diversified portfolios during Fed policy inflection points. The conversation concludes with Bassman's strong case against the re-privatization of Fannie Mae and Freddie Mac, detailing the potential negative consequences for the housing market.

Topics Discussed

• The creation and mechanics of the MOVE Index as a VIX for the bond market

• Explaining complex financial derivatives by drawing analogies to fundamental physics concepts

• Constructing highly asymmetric, long-term trades based on the shape of the yield curve

• The failure of traditional diversification during major inflection points in Federal Reserve policy

• The paradigm shift to passive investing flows overriding traditional market valuation metrics

• A new trade idea involving a positive-carry call option on Treasury rates as a recession hedge

• The evolution of portfolio tools like Return Stacking and derivative-based ETFs

• Identifying U.S. immigration policy as the most significant and overlooked macroeconomic risk

• The public policy argument against the re-privatization of Fannie Mae and Freddie Mac

Transcript
Harley Bassman:

I mean, if you wanna go and play Robin Hood and do options,

2

:

be my guest, but most of you should

be constructing longer term portfolios

3

:

where you're not gonna trade that often.

4

:

Structure it right, size it right,

and the end of the day, I can

5

:

assure you, you'll be better off.

6

:

You won't be as much fun in a party, but

you will be smiling at the end of the day.

7

:

Adam Butler: Okay.

8

:

Good morning, good

afternoon, good evening.

9

:

wherever it is your time, I'm

here with Convexity Maven, Harley

10

:

Bassman, who's back on as a

guest after two or three years.

11

:

Harley, we had you on in, oh,

it was probably, you know,:

12

:

2020 now is sort of pre pandemic, I think.

13

:

And, I know it was interesting,

Dan, you were, you had a really neat

14

:

trade set up that you were working

on, that you were deploying as an

15

:

ETF, which worked out really well.

16

:

I wanna get into that a little bit later.

17

:

Harley, you're currently what, a

managing partner at Simplify ETFs

18

:

and also invented the MOVE Index.

19

:

Harley, let's start with what is the

MOVE index and how did that come about?

20

:

Harley Bassman: Well, I, I, I suspect,

well, thank you for having me back.

21

:

Fun to be here.

22

:

the VIX came out, I think

in 90, I think it was 94.

23

:

I, and at the time I was running

bond options at Merrill Lynch and I

24

:

saw the VIX and go, wow, that is a

darn clever idea, ma'am, because the

25

:

problem you had with, with options

is how do you explain it to people?

26

:

How do you level set

what's high, what's low?

27

:

And the VIX basically does that,

in a very, you know, easy kind

28

:

of way, that's easy to calculate.

29

:

And I said, geez, I, I'll do it for bonds.

30

:

It's a good way for me to go and

sell, you know, options to people,

31

:

you know, clients at the time.

32

:

It was 30 years ago.

33

:

Um, and I actually, the move actually,

goes before the VIX because I have data

34

:

going back to, 1988 already in my system.

35

:

So I could populate six years

just to the drop of the hat.

36

:

So actually the move is, if you

pull it up, we'll go longer.

37

:

The vix, it's just very simply a blend of

one month implied volatility options on

38

:

the two year, five year, 10 year, 30 year.

39

:

Waited 20, 20, 40, 20.

40

:

Double waiting on the tenure because

that's the benchmark for most trading.

41

:

And that's it.

42

:

And it's always a one month option.

43

:

You gotta be a little careful about it

because since it's always one month,

44

:

sometimes you'll get two payrolls in

it, or you'll get, you'll pick up,

45

:

you know, an extra, business day.

46

:

That's interesting.

47

:

And so it'll jump for one day.

48

:

So you gotta be a little

careful about that.

49

:

Same thing with the vix, by the way.

50

:

but, um, uh, that's it.

51

:

And, and, you know, the old rule

was you buy 80, you sell one 20.

52

:

this changed after the financial crisis

when, when Val really got drilled on down,

53

:

when, in the fifties and sixties, four

years ago before they started hiking.

54

:

and the problem you have with the

strategy of you buy it low and sell

55

:

it high, is that when it's trading

60, 70, 80, nothing's happening.

56

:

And, you know, nothing's

ever gonna happen ever again.

57

:

And why would you possibly buy

this ticking, decaying, you know,

58

:

asset where you're burning theta?

59

:

So no one buys at the bottom

and what's up at one 40?

60

:

You're at your desk

crying for your mother.

61

:

No one sells options up there.

62

:

They're all out of their gut minds.

63

:

So it, it gives you a sense of

what's happening, but people,

64

:

reallyt make any money off of it.

65

:

Oh,

66

:

Adam Butler: That's the same

thing with the vix, right?

67

:

You know, you just spend so long with

the VIX hovering kind of between.

68

:

You know, 10 and 15, and it just feels

like nothing's ever gonna happen again.

69

:

And the term structure is so steep

that that to, to buy puts against

70

:

something happening is just so expensive.

71

:

Like you say, you're burning so

much data and, um, then by the

72

:

time it, it pays off, it pays off.

73

:

So suddenly that, you know, no one's

actually able to capitalize on it.

74

:

And then once it's, you know,

once you're in full panic mode,

75

:

the last thing anybody's thinking

about is, I, I wanna sell vol.

76

:

So, so,

77

:

Harley Bassman: Oh, when the VIX

is over 40, no one's selling vol,

78

:

Adam Butler: yeah, exactly.

79

:

Yeah.

80

:

Harley Bassman: which is why I said 40.

81

:

Adam Butler: right?

82

:

Right.

83

:

So then, so who were the natural

buyers of this when you created it?

84

:

You were reaching out and you're

pitching this buy at 80, sell at one 20.

85

:

was, was this a structural trade that some

institutions put on, or was it tactical?

86

:

Harley Bassman: You know, all

option trading, is basically the

87

:

same when you think about it.

88

:

And this is for equities also.

89

:

when you sell an option also, so a

stock's trading at a hundred, you sell

90

:

the one oh five call for three points.

91

:

What are you doing there?

92

:

What you're really doing is you're, you're

taking potential possible future gains.

93

:

I stock was above 1 0 5.

94

:

You're taking as income right now.

95

:

You're taking in the income.

96

:

And, and so the most you can

make is that three points.

97

:

You, you could, I won't say lose

because it's a covered call, but I

98

:

mean, it's really a conversion process.

99

:

Kinda like this mathematical idea of

converting capital gains into income

100

:

back and forth, and people have various

needs at various times to go and do that.

101

:

I mean if you really look at, we were

hiring in the nineties, all physics PhDs.

102

:

That's who we hired, uh,

under the training desk.

103

:

And the reason why is at the end

of the day, derivative financial

104

:

trading, financial engineering

is just the physics of money.

105

:

That's it.

106

:

And when you look at like delta,

gamma, theta, all delta is is velocity.

107

:

All gamma is acceleration.

108

:

It's the exact same thing.

109

:

If you took, you know, ninth grade

high school stat and 10th grade

110

:

physics, you could do my job.

111

:

We just changed the names

around, make 'em Greek.

112

:

So it sounds sexier, but

there's no difference.

113

:

It's all the same formulas.

114

:

Adam Butler: That's right.

115

:

If you know, you know,

grade 12 ballistics right.

116

:

VT plus one half at squared, then, then

you can do most, most, most options math.

117

:

So yeah, that's, that's a good insight.

118

:

Um, alright, and so as convexity

maven though, you were, you sort of

119

:

migrated to, I identifying or, or,

or monitoring markets primarily sort

120

:

of fixed income markets, looking for

highly asymmetric mispriced trades.

121

:

Right?

122

:

So what that often meant, presumably,

is that you were oftentimes really

123

:

like quite early to the game, right.

124

:

which meant that by its very nature

you ended up sort of burning some theta

125

:

before the, the trade, actually paid off.

126

:

Can you gimme any, any

good stories or examples

127

:

of Yeah.

128

:

Harley Bassman: Well, you know, for

the first part of my career I was

129

:

an option market maker basically

like three, six months on in.

130

:

That is very heavy lifting and

why I lost most of my hair.

131

:

Um, after I, when I became more of a prop

hedge fund trader, uh, later in my career,

132

:

I pushed my trading out to like, you

know, three to five to 10 year trading.

133

:

where I, I have an idea.

134

:

I think I'm right.

135

:

I'm pretty sure I'm right.

136

:

I start the timing of it.

137

:

and where the opportunities

arise is when you get these weird

138

:

discontinuities and, and the biggest

one being the shape of the yield curve.

139

:

So simple, some simple math here.

140

:

you're advising grandma, okay?

141

:

She has, has $10,000.

142

:

She wants to invest it.

143

:

Uh, the one year CD is trading at

3%, the two year CDs trading at 4%.

144

:

What do you tell grandma

to do with her money?

145

:

Very simple.

146

:

Actually.

147

:

You can create a situation of

I can earn 4% for two years.

148

:

Or I can earn 3% for the first year.

149

:

What do I have to earn the second

year, the second one year period?

150

:

So those two one year periods equal 4%.

151

:

That's called the forward rate.

152

:

And in this case, ignoring,

compounding, it's five, right?

153

:

I get TH five, I get three.

154

:

That's 4%.

155

:

So the question is, do I think

the one year rate will be above

156

:

or below five one year from now?

157

:

That's all there is to it.

158

:

People will talk about forward

rates as being a prediction.

159

:

That's false.

160

:

It is not a prediction.

161

:

In fact, people, people say,

that kinda gets me angry.

162

:

It's not a prediction, but it is the

back end of an arbitrage free process.

163

:

And if you remember the book, um, Liar's

Poker, what Sawn Brothers did in the early

164

:

eighties was they figured out how to trade

forward rates before anybody else did.

165

:

And they basically created free

money by buying and selling this

166

:

one year, one year forward rate.

167

:

Okay.

168

:

What happened, you know, in, in the

last cycle here was, um, we had interest

169

:

rates go down to zero, five years ago.

170

:

And we had the move go to like 55.

171

:

And I said, well, I'm, I'm, I'm a U

Chicago, NBA, kind of think I believe

172

:

that you print money, you get inflation,

not right away, but that's kind of it.

173

:

If I have, you know, $10 and 10 loaves

of bread, then it's a dollar a piece.

174

:

If I go and print five more

dollars out of nothing, at some

175

:

point I make no more bread.

176

:

The bread goes up in price.

177

:

Okay?

178

:

And so I said I wanna go and buy

a, an an option, a put option on

179

:

like the 30 year treasury, but

I wanted to be way out there.

180

:

So I bought a seven year option

on the 30 year treasury basically.

181

:

And we put that into an ETF.

182

:

And this is the magic of why I

kind of came out of retirement.

183

:

Is it simplify what we do.

184

:

There was a rule change five years ago.

185

:

SEC allowed people to put IVs,

futures options, swaps, everything

186

:

else into ETFs that became legal.

187

:

And at my firm we did this.

188

:

And so what we do is we take professional

investment products that the big hedge

189

:

funds, the Citadels use the state

of California Prudential Insurance,

190

:

and we use exact same products from

Morgan Stanley, Goldman Sachs, JP

191

:

Morgan, and put them into ETFs.

192

:

And so I was able to go and

buy a seven year option.

193

:

Believe it or not, they exist and they

trade rather easily on the, you know,

194

:

not the exchange, but dealer to dealer.

195

:

And I put it through ET tf.

196

:

And this thing went from, you know,

37 up to one 14, you know, two years

197

:

ago when the Fed started hiking rates.

198

:

Yeah.

199

:

Pretty good deal there.

200

:

That's all it was.

201

:

Adam Butler: a great pass.

202

:

Yeah.

203

:

I remember watching that whole story.

204

:

We interviewed you during the

evolution of the thought process.

205

:

The execution was brilliant,

the payoff was amazing.

206

:

and yeah, that rule change.

207

:

Has just enabled such a, proliferation

of incredible new tools for advisors.

208

:

The ability to stack sort of derivative

based or, or levered or option based

209

:

type strategies on top of other types

of core exposures create very specific,

210

:

uh, you know, types of payoff functions.

211

:

We do the same thing at Return

Stack ETFs, stacking managed futures

212

:

style strategies on top of, you

know, core S&P or bond, exposures.

213

:

And, I mean, just the tools

available to advisors right

214

:

now are, are truly incredible.

215

:

but I, I'm, I'm wondering why you chose

the 30 year there instead of like, if

216

:

the bet was that that, some combination

of monetary and fiscal was going to.

217

:

Inevitably create inflation.

218

:

Obviously the bet was you're gonna

create inflation in the next seven years.

219

:

why not go, like to take a a, a bet on

the, on shorter rates on two years or

220

:

five years, betting that the Fed was

gonna have to react to that and you'd

221

:

get a, you know, just a higher, you

know, the 30 year wasn't a treasury, but

222

:

the two year was, sorry, it wasn't at

zero, but the two year was pretty close.

223

:

Right.

224

:

So would you have not gotten

a, a larger payoff on that?

225

:

Or what was the premium on those

options on the two year is just

226

:

so much larger than the 30 year.

227

:

Like how did you come about that specific

228

:

Harley Bassman: There were, it was a

somewhat technical in terms of the shape

229

:

of the yield curve, and this gets really

into the weeds that I'm not gonna do here.

230

:

but also there's the, there's

the, if I'm trading the front end,

231

:

so basically zero to five years,

I'm really talking to the Fed and

232

:

certainly zero to two is all the Fed.

233

:

Adam Butler: Right.

234

:

Harley Bassman: Do I know what

the Fed's gonna go and do?

235

:

No, I don't.

236

:

I know what they should do.

237

:

I know what they should not have

done, which is they shouldn't have,

238

:

you know, kept doing QE in 2013.

239

:

I mean, that, that, that, that mean, if

the Fed had just done the zero rate thing

240

:

in 2013, stopped it, I don't think it

would've had, you know, all the problems

241

:

we've, we've, we've had since then.

242

:

but I'm not the fed, but the backend

that's gonna be more market controlled

243

:

and so the fed printing money will

go to the backend and also the

244

:

shape of the yield curve back then

and the, uh, implied volatility,

245

:

it gave me a lot more leverage.

246

:

I had to go put fewer dollars to

work to get the payoff I wanted.

247

:

and, and, and that's very important

for people to understand is there's,

248

:

there's different ways to get leverage.

249

:

usually people hear the word leverage

and think margin, margin call, they

250

:

think bad, which is kind of true.

251

:

There's other ways to get leverage.

252

:

Buying an option is a way

to give you leverage without

253

:

be exposed to a margin call.

254

:

Um.

255

:

You, you've taken the leverage and

embedded it into the actual structure

256

:

of the, of the security as opposed to

something like buying futures contracts

257

:

and, you know, levering that up.

258

:

so I I, I mean, it's once

again a little complicated.

259

:

I suspect your, your listeners here

understand what I'm talking about.

260

:

and, and, you know, return

stacking is just adding leverage.

261

:

but when, when, when, when the

return stacks are, negative

262

:

correlations, it actually reduces

risk as opposed to increasing it.

263

:

so, uh, and, and by this is what Bill

Gross did, you know, we're basically,

264

:

we, we, we are basically PIMCO jr.

265

:

bill Gross was the first guy to put to

Rives into a 40 ACT fund in, uh, 85, 86,

266

:

where he started buying futures contracts

as opposed to buying the cash tenure.

267

:

And then with the conserved

cash, he bought floaters.

268

:

And, um.

269

:

You know, you, you go and you beat the

index by 50 basis points for 10 years.

270

:

They call you the bond king.

271

:

Adam Butler: The Bond King.

272

:

Yeah, for sure.

273

:

Yeah, he sort of unitized

Portable Alpha, right?

274

:

Obviously Portable Alpha had been

around for a lot longer than that.

275

:

And then he sort of put it in a Unitized

Forti Act product and, and you know,

276

:

to be fair, really delivered for

investors too, using structural Alpha.

277

:

but.

278

:

Still, it was a, it was a real innovation.

279

:

so this actually dovetails, well, this,

the, the, the bet that you had sort of

280

:

made several years ago, which you wrapped

into the ETF, the, the bet that it was

281

:

inevitable we were gonna get inflation.

282

:

And what, how can I create this

highest convexity, payoff structure

283

:

betting on this inflation?

284

:

we were chatting before our, you know, we,

before we went live about the fact that,

285

:

you know, at resolve, we focus on really

diversification, like global diversified

286

:

risk parity portfolios, trying to account

for the major muscle movements that.

287

:

Dominate, dominate asset class

movements, changes in expectations

288

:

for growth and inflation.

289

:

And so, you know, depending on the

sources of growth, the sources of

290

:

inflation, you got kind of disinflationary

growth or inflationary growth or,

291

:

or disinflationary contraction

or an inflationary contracts or

292

:

stagflation, these types of, of regimes.

293

:

And you, you try to put assets together

in balance so that they generally hedge

294

:

one another against these different

types of risks and environments.

295

:

And let's call this kind of an all weather

portfolio or a global risk portfolio.

296

:

We, certain risk parity portfolio,

we certainly didn't invent it goes

297

:

all the way back to Harry Brown

and, and further back than that.

298

:

But one of the things we noticed about

the Harry Brown permanent portfolio

299

:

or all weather or global risk parity,

and even when you start to stack

300

:

on, you know, more sophisticated

managed future style strategies.

301

:

Is that there are still these periods

in, you know, we identified kind

302

:

of 19 91, 94, 2004, 2006, 20 13, 16

17, which just seemed to take the

303

:

wind out of the sails of all of the

different asset classes at once.

304

:

They all kind of go down together,

bonds, gold, commodities, equities, they

305

:

all kind of tend to fall in concert.

306

:

There's this systematic risk factor

that is just not, not in a typical

307

:

kind of global risk parity portfolio,

but which is a, a major vulnerability

308

:

of all of these types of portfolios.

309

:

And I I thi I thought that you would

be a really good one to have some

310

:

thoughts on what might be missing there.

311

:

Right.

312

:

I think you've come at the market and

were raised in the ecosystem that it might

313

:

be right in the sweet spot in kind of

helping to discover what's missing there.

314

:

Uh, we'll just walk through how,

an investor might be able to patch

315

:

this, this potential hole in, in the

portfolio diversification equation.

316

:

What are your initial thoughts on that,

given those specific time periods?

317

:

Harley Bassman: Okay.

318

:

So Ray Dalio became a

billionaire for risk parity.

319

:

Okay.

320

:

an idea that may have been already

out there, but he just took at

321

:

times, you know, a hundred billion.

322

:

Um, and, the idea would be you, you

have a hundred dollars, maybe you put,

323

:

you know, a hundred into stocks and,

and 40 into bonds, but via futures,

324

:

and you kinda lever it up that way.

325

:

and, and as long as stocks and bonds

go in different directions, you

326

:

actually reduce your volatility of the

portfolio, even though you're levered up.

327

:

the problem is this, you are looking

at a correlation looking backwards.

328

:

You're adjusting the sizing based

on that correlation, but that all

329

:

assumes that the sign is negative.

330

:

That one up, one down.

331

:

Where did they both go together?

332

:

And I've written about

this for many, many years.

333

:

You go to my website and find

all my stuff writing about this.

334

:

Yeah.

335

:

Adam Butler: But just let me, let me

just, let me pause because I wanna

336

:

make sure that we're, we're discussing

the, the complete picture here.

337

:

So I wanna expand the canvas a little

bit, but beyond stocks and bonds

338

:

here, because we agree on this, right?

339

:

That, that just inverse vol weighting

stocks and bonds leaves a massive hole in

340

:

your portfolio from a risk perspective,

which is the inflation risk, right?

341

:

Where stock and bond correlation

converges on, on one, all of the

342

:

divers diversification benefit that

you expect between stocks and bonds

343

:

is expected to go away mechanically

during an unexpected inflation spike.

344

:

Which is why you wanna also add things

like commodities and gold and tips or,

345

:

you know, breakevens, for example, to

the portfolio to try and hedge against.

346

:

The, the convergence in, in

correlations between stocks and

347

:

bonds, during inflation spikes, right?

348

:

So just to expand the canvas

and set the, and set the table.

349

:

Even a portfolio that contains all of

the elements that I just described still

350

:

has these weird air pockets, right?

351

:

So I just wanted to make sure we sort of

started there instead of starting at the

352

:

gap with just the stock bond risk parity.

353

:

'cause I think we'd all be kind

of in agreement on that one.

354

:

Harley Bassman: Well, I mean,

you hit the nail on the head.

355

:

I mean, data shows that when inflation

goes above two and a half or tens, 10

356

:

year rates go above four and a half.

357

:

The, uh, sign on the correlation

flips and they both go positive.

358

:

Both go negative as

far as everything else.

359

:

What happens is, because people

tend to use these strategies very

360

:

commonly when the sign flips, so

they're both go up and down together.

361

:

They have to de-lever.

362

:

What they do is they sell everything.

363

:

So you've seen gold and tips and

everything else go, go down the tubes.

364

:

I wouldn't say, but that

tends to be temporary.

365

:

but can you, which is why I always say

sizing is more important than entry level.

366

:

Trying to time it, you're gonna fail.

367

:

Okay?

368

:

You gotta size it so you could take

a, a rattling of the markets and

369

:

not get stopped out, because that's

what happens with these markets

370

:

is, is everything goes south.

371

:

Correlation one, people get stopped

out, they don't get back in again,

372

:

and then the whole thing, you know, un

373

:

Adam Butler: But let's go back

to like, let's go back to like

374

:

91 and 94 and even oh four.

375

:

I think the amount of these kind of

lever diversified kind of permanent

376

:

portfolio weather portfolios, they

were still pretty small relative to the

377

:

size of the overall markets, and yet

you still do have these periods when

378

:

kind of everything goes down together.

379

:

So maybe if we sort of sidestep

this whole discussion of kind of

380

:

risk parity and just talk more about

these strange environments where

381

:

diversification kind of fails, right?

382

:

Where you're a typical kinda

long only portfolio that's trying

383

:

to diversify between inflation

and growth sensitive assets.

384

:

Well, all of those inflation

and growth sensitive assets all

385

:

kind of flop together, right?

386

:

And my, my supposition, which I, I I

mentioned before and which could be

387

:

totally wrong, which is what I wanted

to kind of grind through with you, was

388

:

that, it might be due to an unexpected

increase in the expected cash rate, right?

389

:

The Fed comes in and either.

390

:

Jawbones a potential unexpected rate

hike that the market had not been pricing

391

:

or expecting, or they actually come in

and sort of do a surprise rate hike.

392

:

Maybe the market was expecting 25

and they came in with 50 or 75.

393

:

Right?

394

:

Or, or, or, but something

happened that, right?

395

:

Yeah.

396

:

So I'm just wondering, so first

of all, am I right in my intuition

397

:

that that many of the time periods

that I highlighted may have had

398

:

that, that draw down in everything

partly, or mainly for that reason?

399

:

Are there other things at play?

400

:

And then we could talk about how can

a long only investor best diversify

401

:

against that kind of, everything

falls together kind of outcome?

402

:

Harley Bassman: I, I don't think it's

the surprise factor that you mentioned.

403

:

Um, well, I guess you could be.

404

:

Everything's a surprise nowadays.

405

:

I think it's the inflection points on

the yield curve or really the inflection

406

:

point of the Fed, which kind of dries it.

407

:

So if the Fed's hiking rates and

they hike and they hike and they

408

:

hike, that's not quite a surprise.

409

:

You kinda know what they're doing.

410

:

It's when do they come, when

do they get a reverse course?

411

:

When when's the first cut coming?

412

:

And that's what we saw happen over here.

413

:

That's when the markets ran and,

and when the first hike happened,

414

:

rates were zero for a long time.

415

:

When they hiked well, then

everything blew off the map.

416

:

I think identifying these

inflection points in the Fed and

417

:

thus, more importantly in the

yield curve is, is important.

418

:

And if you go look back, the

curve was Max was max inverted

419

:

in, uh, you know, late 23, 24.

420

:

and it's now positive and it

might go and it's probably

421

:

gonna go a lot more positive.

422

:

and so I think, I think it's the

yield curve, that's driving it.

423

:

And, and that's been driven by the Fed.

424

:

So it's not the actual, if they're

in a hiking process and you're 20

425

:

fives and toss in a 50, like you

might call it a surprise, I would

426

:

say it's going the same direction.

427

:

It's, it's, it's, and stopping

is also not a big deal

428

:

Adam Butler: right.

429

:

So it's more this sort

of inflection point.

430

:

Harley Bassman: when, when they turn

431

:

Adam Butler: when the market has been

going along as if the Fed is gonna stay

432

:

loose forever and the Fed makes the

first noises, or takes the first steps

433

:

on the tightening cycle is that's kind of

when you, you get these big downdrafts.

434

:

Harley Bassman: Or the, or the

easing, actually, I mean, easing

435

:

in theory is helpful because,

you know, you lower the, the, the

436

:

present value of cash flow changes.

437

:

But when they're cutting

rates, that's a signal.

438

:

Probably they're worried about the

economy and that could be a challenge.

439

:

and also the back end of the curve

often goes up, which we saw this

440

:

time, ev everyone thought when

the fed cut rates were gonna see,

441

:

you know, everything come down.

442

:

It didn't, you know, twos came down

by a hundred and bonds went up by 50.

443

:

Right.

444

:

Adam Butler: yeah, yeah.

445

:

But it's not so much always

that the backend goes up.

446

:

It is that the, what is it again?

447

:

It's a, it's a bull steepening, right?

448

:

It's like the, the, the, the

short-term rates come down

449

:

faster than the long-term rates.

450

:

Harley Bassman: but this time here, we

actually had the backend go up and the

451

:

Adam Butler: Right, right.

452

:

In the, in the modern context.

453

:

Yeah.

454

:

Harley Bassman: Yeah.

455

:

And th this, this is not, we

have not invented tragedy here.

456

:

This has, this has happened before.

457

:

Adam Butler: Gotcha.

458

:

Okay.

459

:

So like in the 91, 94.

460

:

So, so there's, it's not

just one type of situation.

461

:

It's not just the Fed is,

is unexpectedly hiking.

462

:

It's also where is the yield

curve when the Fed pivots?

463

:

That's also a really important, context,

464

:

Harley Bassman: Yeah.

465

:

But I mean, look, up until now,

at least, what has been the

466

:

best predictor of recession?

467

:

Invert Curve.

468

:

Adam Butler: right?

469

:

Harley Bassman: two tens, but actually

three month to 10 year treasury,

470

:

not swaps, that has, that has the

best historical 40 year record of

471

:

part, particularly, a recession.

472

:

which we, we have this, you know, a

while ago and it, we came out recently,

473

:

where it finally flipped over.

474

:

so in theory, we're supposed to get a

recession in, you know, six to 18 months.

475

:

So theoretically we should get

a recession between December of

476

:

this year and June of next year.

477

:

Will that happen?

478

:

I don't know, but I mean, that is the best

historical, correlation of recessions.

479

:

Adam Butler: Right, and, and you

know, it's for, for a global, like

480

:

for a, a portfolio that's, that's risk

balanced between, between, treasuries

481

:

and equities and gold and commodities.

482

:

A recession, you know, a recession

is painful because the equities and

483

:

the commodities obviously drop, but

the equities and commodities, they

484

:

don't have a huge amount of weight.

485

:

Gold can kind of go either way, right?

486

:

It, gold can, can drop typically

early in a recession and then it

487

:

begins to, to rise once the fed drops

into negative real rates territory

488

:

in order to stimulate growth or

fiscal kicks in or what have you.

489

:

But treasuries can be

relied upon typically too.

490

:

Rates are gonna fall and treasury are

gonna rise, and you've got a, a risk

491

:

appropriate allocation to treasury.

492

:

So as long as you've got sort of, you

know, one or one and a half or two

493

:

pistons in the diversified portfolio

working, you're typically okay.

494

:

But these, these, the situations that

I'm really trying to narrow down to that

495

:

sort of 91, 94, 0 4 type situations,

treasuries, drop stocks, drop gold

496

:

drops, come outta these drop tips,

you know, break evens, don't do much.

497

:

Like it's, it's those particular

periods that I'm, you know, I'm mostly

498

:

trying to really keen in on, I'm,

I'm wondering whether you got, you

499

:

know, any particular intuition on,

on, on that particular situation.

500

:

Harley Bassman: If you're trying

to get me to predict the next

501

:

Adam Butler: No, I'm not.

502

:

I'm not, I'm not, I'm really, I'm

really trying to, to narrow in on like

503

:

what is the systematic risk factor.

504

:

Not like what's gonna happen in the

next few months, but rather what is

505

:

the systematic risk factor in common?

506

:

With those incidents and, and is there

a, a strategic allocation that one could

507

:

add to like a, a, a diversified portfolio

that's trying to manage against, you

508

:

know, inflation and, and growth shocks

that would help to mediate those,

509

:

those specific types of experiences?

510

:

By the way, I'm now like hammering

you and I, I feel, but I do feel

511

:

like you've got some ins insight.

512

:

Like what, let me, let

me, let me back it up.

513

:

What does do well when the fed, when the

fed does pivot from, from loose, loose,

514

:

loose to, to beginning to reset market

expectations for a tightening cycle,

515

:

what does well in that period?

516

:

Harley Bassman: I think there's been a

systematic change, a paradigm shift over

517

:

this last, you know, 30, 40 years that

you, you're kind of kinda looking at.

518

:

And as I think we went from a value

active manager proposition to a

519

:

passive flow situation, my partner,

Michael Green, has done excellent,

520

:

excellent work on this entire topic.

521

:

And although he is been wrong on interest

rates and inflation, I think he is

522

:

right on, on passive what's driving it.

523

:

And I think what's going on over

here is this, the millennial cohort,

524

:

they have jobs, big companies,

they do matching 4 0 1 Ks.

525

:

I've told all my kids just max out

those 4 0 1 Ks, put, you know, 70, 80%

526

:

into, into an equity, you know, passive,

uh, I'm not gonna mention a ticker.

527

:

SSPX put 2030 into some IG five year.

528

:

Corporate bond fund reinvested,

divs called me in 30 years.

529

:

and I think what's happening is

these flows just from this bulging

530

:

demographic of the, uh, millennials.

531

:

Remember, millennials are actually

bigger than the boomers by number now.

532

:

The boomers were bigger by percent of,

of, of the country, which is why we drove

533

:

everything, um, and took everyone's money.

534

:

but, but I mean, one, they're,

they're, they're pretty big out there.

535

:

And if this money keeps going into

passive, it value doesn't matter.

536

:

I mean, we have all the, I mean, Cape

and everything, every other value

537

:

metric is off the charts right now.

538

:

And I don't see it changing until

we see unemployment go above 5%.

539

:

And I'm picking the number

kind of outta the hat.

540

:

I'm saying that is what will stop the

passive flow is people not having jobs.

541

:

'cause if you don't have a job,

you're not getting a 401k, you know,

542

:

coming a matching coming at you.

543

:

I think that's, I think that's gonna

be what's gonna turn the market.

544

:

I think value has no meaning.

545

:

'Cause I can guarantee you, my kids

have no idea what the PE is of the S&P.

546

:

They don't even care.

547

:

They said they, they said, they said,

we're gonna do this in 30 years.

548

:

It all kind of balances out.

549

:

And truth be told, they're right.

550

:

And inflation and equities are a great

inflation hedge over the very long term

551

:

because a company can raise prices.

552

:

By definition, inflation is raising prices

and therefore the nominal return of stocks

553

:

is always going higher with inflation.

554

:

The PE might be lower or higher, but

the, but if the company doubles their

555

:

prices, they're gonna make twice as

much money and the stock price is gonna

556

:

double basically with the same pe.

557

:

So over the long period of time, average

will go up as long as you think there's

558

:

gonna be population growth and inflation.

559

:

Adam Butler: so I mean, I

think if you, my sense anyways

560

:

is looking historically that.

561

:

In general, equities do well

in an inflationary boom up

562

:

until a certain threshold,

563

:

Harley Bassman: When?

564

:

When tens get above four and a half or

inflation above two and a half, yeah,

565

:

Adam Butler: yeah, right.

566

:

At which point, you know, the

market tends to get skittish

567

:

about inflation expectations.

568

:

The inflation genie kind of, you

know, escaping the bottle and, and,

569

:

Harley Bassman: forget that.

570

:

Just the pure bond math of it.

571

:

I mean, I know Amazon will make

a trillion dollars in 30 years.

572

:

Question is, what do I discount

that trillion dollars back to today?

573

:

And discounting that NPV at 2%

versus 5% is a very different animal.

574

:

Adam Butler: I know, I hear you.

575

:

But then we had two point a half

percent tips yields, out out 30 years

576

:

a year ago, you know, and, and, and

577

:

Harley Bassman: it's crazy

578

:

Adam Butler: here, we're at, at, you know,

at 22 times forward pe on the, on the S&P.

579

:

Right.

580

:

So, I'm, I, I, I know Mike and I've,

I've, we've chatted extensively about

581

:

the passive flows and, and I agree.

582

:

And, you know, I wonder how I, I've

had this hypothesis about, so there's,

583

:

there's a lot of, there's a lot in the

news lately about AI displacing jobs.

584

:

You know, I think in a way

it's a little bit overblown.

585

:

I think some parts of parts of it are,

are almost under blown a little bit.

586

:

But, but the irony is you've got a,

you've got a market that's pricing AI

587

:

companies as though there's going to be a

massive proliferation of AI and robotics.

588

:

What are they going to do?

589

:

Who's gonna buy them if they're not

gonna massively increase productivity?

590

:

How do you increase productivity by

displacing lower productivity workers?

591

:

Right?

592

:

So the unemployment rate is going to tick

higher in the, at least in the short,

593

:

intermediate term while this takes place.

594

:

If that's true and the passive flows

argument is also true, then I wonder

595

:

if these companies are not sowing the

seeds of their own destruction because

596

:

you know, once you've got a certain

threshold of unemployment, like you

597

:

say, then those passive flows turn

from at the margin positive to at the

598

:

margin negative and multiples begin

to contract even while profit margins

599

:

at companies may be, may continue to

expand and you, so you may have like

600

:

the market kind of treading water or

even dropping while profit margins.

601

:

Continue to expand and,

and earnings grow nicely.

602

:

Is that something you guys have,

have contemplated internally?

603

:

Harley Bassman: My job is

not to go predict the market.

604

:

My job is to, is to give you products that

you can use to, to predict the market.

605

:

That said, what you're describing is,

um, fiber optic cable 30 years ago.

606

:

I mean, all, we all have

these predictions of it.

607

:

We laid, laid, you know, gazillion

miles of cable under the sea.

608

:

and then we discovered, oh, with

all this cable out there, the

609

:

price per foot is, you know, pretty

small, not what we thought it was.

610

:

And it's because it all went bankrupt.

611

:

AI will be the same thing.

612

:

The price, the, the monopoly

prof profits that if it is

613

:

getting will stop at some point.

614

:

and, we'll, we'll find out what

happens as far as job displacement.

615

:

Look, they cars came out and all the

guys were making saddles and buggy whips.

616

:

They all, they, they

all got jobs eventually.

617

:

we had the same thing with

nafta, out shoring to China and

618

:

Vietnam and everywhere else.

619

:

I, I would say that the

grand political problem.

620

:

Which is why we have our current

situation, not assassinations by the

621

:

way, is that we, the government did a

lousy job of transferring, re retraining,

622

:

helping to move around, people who were

doing, making furniture in North Carolina.

623

:

They should have learned how to

go and do welding and plumbing.

624

:

'cause those jobs pay a bloody fortune.

625

:

You know, any, any qualified welders

are making, uh, over a hundred KA year.

626

:

We, the government should have been

involved in there in this transition.

627

:

And I think our current politics is

basically that we didn't do that, thus

628

:

we widened out the, the income gap.

629

:

Um, and that, that's so,

630

:

Adam Butler: Yeah, I mean, the

American Society of Engineers

631

:

says that there's a $3.6

632

:

trillion infrastructure gap in the us.

633

:

We

634

:

desperately need to replace, you know,

pipes and bridges and, and all manner

635

:

of other types of infrastructure.

636

:

There could have been massive

investment in retraining and

637

:

deploying these to rebuilding.

638

:

America.

639

:

But, instead, the choice was to drive

all of those profits to a narrow group

640

:

of companies who benefited most from, you

know, hollowing out America's industrial

641

:

base and then redeploying all those

excess profits to buybacks and, and, and

642

:

dividends into the, into capital coffers.

643

:

Right?

644

:

So, I mean, we're, we're

definitely on the same page there.

645

:

Harley Bassman: Yeah, I mean, look, but

once again, what I'm saying is over my

646

:

horizon, I'll all, all will be fine.

647

:

You are saying over the next year or

two, how am I gonna trade this thing?

648

:

You're right.

649

:

Also, I mean, there will

be bumps along the road.

650

:

I just don't think that AI is

gonna go and destroy civilization.

651

:

I think, we'll, we'll

just do different things.

652

:

The computers aren't gonna go and, and,

and, and, you know, weld pipes or build

653

:

robots, you know, someone's gonna go and,

and just, and those other stuff for it.

654

:

It's just bumpy.

655

:

And I, I, I expect our politics

will adjust at some point,

656

:

for, for that rational idea.

657

:

I mean, we, we, and I don't believe

China is gonna overtake us ever,

658

:

at least not in my kids' lifetime.

659

:

Adam Butler: Yeah, it's just funny

because, you know, you either are

660

:

betting you, you've got all this

money in market cap indices, the vast

661

:

majority of which is, is effectively

betting on AI at the moment.

662

:

I mean, AI and data center, investment

is kind of propping up the economy and

663

:

AI market caps and, and expectations are

propping up the cap weighted indices.

664

:

That obviously is predicated on the

fact or the expectation that AI and

665

:

robotics is going to be broadly embraced

by the global enterprise market, right?

666

:

which, if it's true and happens on

the timeline, that might justify

667

:

the valuations and the investment

that we're seeing would result

668

:

in massive job displacement.

669

:

So you've got, you know, you've got

that kind of bet already happening,

670

:

but if it plays out like that, I think

you're gonna get unemployment that

671

:

would then undermine the valuation

expansion or multiple expansion that

672

:

we've had through passive flows.

673

:

So you've just got this weird kind

of reflexive bet on at the moment.

674

:

I think that, that, I think it's

kind of fun to sort of toy with

675

:

everybody's expectations and if

everybody gets what they want, will

676

:

they actually get what they want?

677

:

Or will something very different happen

at, at a a market cap investment level?

678

:

Harley Bassman: Well look, not to

go and shill my, my, my, my, my

679

:

own products, but, we just came out

with a new product six months ago.

680

:

that is the opposite of the

bet of rates going higher.

681

:

It's a bet that rates are gonna go lower.

682

:

It's a seven year option.

683

:

On the 10 year rates.

684

:

You should be happier.

685

:

It's a 10 year, not a, not the 20 year.

686

:

and this, option because of

dynamics, and you go to my

687

:

website, I've written about this.

688

:

Actually earns a positive 2% yield.

689

:

You're long an option.

690

:

Limited loss, unlimited gain.

691

:

Okay.

692

:

With a positive yield.

693

:

Adam Butler: Okay, so what's the

bet on, what's the bet you're

694

:

you're making here, Harley.

695

:

And why?

696

:

So this is sort of like the

next, version of your other

697

:

bet, the, the PFI bet, right?

698

:

Harley Bassman: it's the opposite.

699

:

Yes.

700

:

and

701

:

Adam Butler: yeah.

702

:

So, so why, why this and why now?

703

:

And, and why is it structured this way?

704

:

Harley Bassman: I kind of felt that

up at, uh, 5% on bonds we're getting

705

:

to the higher end of the range.

706

:

Could it go higher?

707

:

Yeah.

708

:

Could inflation keep going?

709

:

I think it will, but we're getting

up to where that's starting to be

710

:

a, an impact on, you know, society.

711

:

And so now it's, will

we get that transition?

712

:

Will the Fed start to cut?

713

:

Maybe even more than just a little.

714

:

Because they have to, because actually

we do have that recession coming

715

:

as the curve kind of indicates.

716

:

And if that happens and you get

like those power windows down rate

717

:

environment, having a 40 duration

instrument with positive carry,

718

:

think of what you can do with that.

719

:

You only got a, I mean, the, the ag

is a six, six and a half duration.

720

:

I could put a dollar to work and get a 40

duration, so I only gotta buy, you know,

721

:

15% to get the same duration exposure.

722

:

And the other 80% can go to any,

get the gold to this, to that

723

:

and do your return stacking idea.

724

:

That's pretty clever.

725

:

the trades I like, I mean there's

been some of these, um, I'm, I'm not

726

:

gonna mention tickers, but you know,

floating rate, loans that yield,

727

:

you know, seven, 8% or some of the,

um, BDC equities, you know, they

728

:

are, they yield eight, nine, 10%.

729

:

that, that's, that, that, I mean,

if you get eight, 9% compounded,

730

:

that's equity returns forever.

731

:

You have credit risk in there.

732

:

What's gonna cause the credit

risk to go and go south?

733

:

It's gonna be a recession.

734

:

We got a recession rates, it's

gonna go down hard, it's gonna hard.

735

:

I got a 40 duration asset in my pocket.

736

:

I'm looking pretty good.

737

:

and, and that's the clever idea of getting

leverage via this option as opposed to

738

:

buying, you know, five futures contracts.

739

:

You have five futures contracts,

all of a sudden you, you, you

740

:

lose five to one on the way down.

741

:

Also, you buy an option, you lose one

for one, make three to one, four to one.

742

:

That, that sets a different,

that, that's pretty clever.

743

:

And, and once again, it's,

it's, these are professional

744

:

instruments that are available.

745

:

Only the pros and putting them

into ETFs is a clever idea.

746

:

So that would be my best idea right now is

to go and buy this long dated call option.

747

:

You don't go buy a lot of

it and then put some income

748

:

producing investments in there.

749

:

And I'll say one thing that's

very important is when, if you go

750

:

look at anything that's not like

ultra high grade, in fact even

751

:

IG also has a negative duration.

752

:

High yield's a negative duration.

753

:

You can have rates go down by a hundred

and have high yield bonds go south because

754

:

that spread can widen more than the,

uh, bond, the, the treasury goes down.

755

:

Um, that's why you gotta go and,

and buy over, buy, duration.

756

:

So if you go use this option ETF,

you could get 12 duration in that

757

:

by buying twice as many of it.

758

:

Right.

759

:

And that'll offset you put

that with a high yield product.

760

:

Well, not, there you go.

761

:

You got a high yield instrument portfolio

with a, an embedded insurance policy.

762

:

Adam Butler: Right.

763

:

I mean, high yield spreads are

pretty grim at the moment too.

764

:

Right?

765

:

What do, what do you see as the sort of

ideal pairing like between the the trade

766

:

that has the, the best current, carry,

but that is most vulnerable to the type

767

:

of risk that the new product that you've

constructed is best designed to hedge?

768

:

Harley Bassman: I like buying, the, the,

the loan products or the BDC products.

769

:

and then pairing that with my, you

know, levered call option product.

770

:

Adam Butler: leveraged loan?

771

:

ETF plus A.

772

:

Harley Bassman: You know who they are?

773

:

Adam Butler: Yeah,

774

:

Harley Bassman: Or, or,

or, or, or, or the BDCs.

775

:

I like them also, you know, and,

and, and, and the big, there's

776

:

like four name brand ones.

777

:

there's one that's really big.

778

:

I mean, I own them.

779

:

Okay.

780

:

and, and, They're,

they're not gonna blow up.

781

:

I, I would say that, you know,

sometimes if the yield's too

782

:

good to be true, it is okay.

783

:

You're better off sometimes taking a

little lesser yield and having a, a, a, a

784

:

product that's just not gonna blow on you.

785

:

and there's a lot of people who look

at these very, very high returns.

786

:

If, if you're looking, it's

like it's yielding 12%, you

787

:

know, there's a reason for that.

788

:

Man.

789

:

Junk bonds yield six, seven, right?

790

:

Eight.

791

:

I mean, if I'm getting 12,

I'm, I'm taking a risk.

792

:

And now it might be risk you want

to take, and I'm fine with that.

793

:

I will tell you, likely you don't,

you've not looked under the hood

794

:

to see what risk you're taking.

795

:

Adam Butler: Yeah, no, I hear you.

796

:

So you're able to get a 2% carry.

797

:

Is that because the yield on the

underlying is, is higher than

798

:

the the carry on the option?

799

:

Harley Bassman: It has to do with the

fact that, when I buy the op ordinary

800

:

options that you buy and sell on the

exchange, you have a suitcase full

801

:

of cash and you give it to someone,

they give you an option or vice versa.

802

:

They give you a suitcase full

of cash and trades right there.

803

:

In the Pros market, we don't trade

options by giving you cash back and forth.

804

:

We say, I will pay you.

805

:

So a seven year option on the 10 year

rate that I do with Morgan Stanley

806

:

or Goldman Sachs, we agree upon a

price and I'll pay you at x expiry.

807

:

I'll pay you in seven years.

808

:

And we do all the calculations.

809

:

And when we do that, we

solve a lot of problems.

810

:

because we don't know what, what the,

the rate that Goldman Sachs borrows

811

:

short term money at is different than

where Morgan Stanley, worse than that.

812

:

Think about, company in Switzerland,

company in Japan, company in Germany.

813

:

The Euro with the yen, the, the

short term rates are everywhere.

814

:

It's very hard to agree upon what

a future, what, what a thousand

815

:

dollars a year from now is worth.

816

:

We all agree it's worth a

thousand next year, but what's

817

:

worth today, we don't know.

818

:

So we, what we've done is we trade

forward and everyone's happy.

819

:

so I buy these options forward.

820

:

So I have all the cash, I put the cash in.

821

:

The treasuries are earning

four point quarter percent.

822

:

The option itself decays

very slowly 'cause it decays

823

:

at the square root of time.

824

:

So going from route seven to

route six, not that big a number.

825

:

Whereas going from route three to

route two is a very big number.

826

:

So that going that long day

option, time decay, kind of goes

827

:

up and flattens as opposed to

interest rate, which goes linearly.

828

:

And so when you have this versus

that, that little triangle

829

:

out there is positive carry.

830

:

Um, and that's, uh, and once

again, that's why I like dealing

831

:

with these long-term options.

832

:

because they allowed me

to go and do something.

833

:

I mean, usually people wanna go and they

wanna make money right now, they wanna

834

:

go to the party and brag what they did.

835

:

I mean, I guess I, I saw in the, in

the, you know, news, some Twitter

836

:

thing yesterday, some guy bought

an Oracle option for, for a penny,

837

:

and it was ended up being worth $8.

838

:

End of the day, it's like,

fine, the guy's a hero, okay?

839

:

but away from that small detail over

there, I mean, you should not, I

840

:

mean, if you wanna go and play Robin

Hood and do options, be my guest, but

841

:

most of you should be constructing

longer term portfolios where

842

:

you're not gonna trade that often.

843

:

Structure it, right size it, right.

844

:

And the end of the day, I can assure

you, you'll be better off, you won't

845

:

be as much fun in a party, but you

will be smiling at the end of the day.

846

:

Adam Butler: I love it.

847

:

Alright, well I, I wanna talk about, your

letter about Fannie Freddie, but before

848

:

we do, any other low hanging fruit kind

of opportunities that are, that you feel

849

:

are kind of page 16 could move to page

three and, and eventually to kind of page

850

:

one over the next three to six months.

851

:

Harley Bassman: Look, I mean, mortgage

bonds are still the, uh, cheapest,

852

:

the, the best risk return out there.

853

:

They were trading 1 75 over,

they're now a hundred over.

854

:

That's still, well more than

their long-term average.

855

:

And it's still more than credit bonds.

856

:

They're trading only 50

over, so you won't get rich.

857

:

But new issue mortgage bonds, you

know, yielding five and change.

858

:

I've done dumber trades than that to

go put money at 5% with no credit risk.

859

:

it's, it's not a big winner, but

that's what's part your money.

860

:

other than that, things are, I

mean, we are in this transition

861

:

period now, the Fed kind of.

862

:

Turning over and the curve going positive.

863

:

It's plus 50 right now.

864

:

Twos, tens.

865

:

it, it, I mean, it's gonna

go back to a hundred.

866

:

I could promise you that.

867

:

The question is, how's it get there?

868

:

Front end, down back, end up.

869

:

The most important thing from a macro

standpoint, from my view, is this.

870

:

It's not tariffs, it's not

tax, it's not regulation.

871

:

Okay?

872

:

They're important.

873

:

That's not where the rubber hits the road.

874

:

It is immigration policy.

875

:

I'm telling you right

now, this is the big one.

876

:

There's the, the government not

withstanding them being fired

877

:

all, all the time has calculated

there's 75,000 illegal immigrants

878

:

who were bad guys, bad girls also.

879

:

They, they, they, they have tickets.

880

:

They, they do, they do bad things.

881

:

We go and deport them.

882

:

God, I'll, I'll go, I'll go buy

the ticket and pay for the gas.

883

:

That's ship outta here.

884

:

We start going up to a million people.

885

:

That's a whole different animal.

886

:

because GDP is people, times,

hours has productivity.

887

:

That's it.

888

:

Nothing more, nothing less people, hours.

889

:

Productivity.

890

:

Productivity ain't gonna

get that much better.

891

:

I guess you could say AI

maybe, but not really.

892

:

Hours.

893

:

How much more can you work?

894

:

It's people, it's population.

895

:

We have negative net

immigration right now.

896

:

We have a birth rate in

this country under 2.1.

897

:

Theoretically we have negative

population growth right now.

898

:

That is not good.

899

:

and Jim Bianco in his last, Macro

Voices said that because of this

900

:

calculation where we used to need

like 1 20, 1 31 40 payroll every

901

:

month to break even, he thinks it

might be only 20 or 30 now, break even

902

:

because population growth is negative.

903

:

if he, if we really go to the screws here

and kick out a million people or more.

904

:

that's, that's gonna be really bad.

905

:

I, I promise you thi

this will end in tears.

906

:

And I'm not making a comment

whether it's good or bad.

907

:

If you believe that we have an immigration

problem and you sincerely believe that

908

:

we should deport a million people,

I will say, that's your opinion.

909

:

You're welcome to it.

910

:

I have no problem.

911

:

Just know there is a cost to that.

912

:

If you're willing to pay

that cost, God bless you.

913

:

Adam Butler: Yeah, I mean, if, if you

want to deport people and you understand

914

:

that GDP is number of people times, times,

hours, worked times, you know the amount

915

:

that you're paid, then you just, I guess

you need to have a policy that is, that

916

:

is ready to, to provide enough fiscal to

offset the negative shock from, from these

917

:

private sector, employment deportations, I

918

:

Harley Bassman: It's stagflation man.

919

:

We're gonna have lower GDP and higher

inflation because you know what?

920

:

If we lose the immigrants who are working

in the chicken plucking factories and

921

:

send 'em back to Mexico, we have to

raise the wage, the marginal wage to

922

:

bring in different people into that job.

923

:

Or we're not gonna be eating chicken.

924

:

So it is inflationary and negative GDP.

925

:

This is a, this, this is the big one.

926

:

If we go through this policy,

by the way, we, he might stop.

927

:

We might, we might stop doing it.

928

:

Um, I'm just saying that that's to watch

out for is, is the immigration policy.

929

:

Adam Butler: Yeah.

930

:

Great insight.

931

:

Alright, let's, um, let's

pivot to your recent letters.

932

:

You said you had a longer letter, which

I read, a few weeks back and you've

933

:

now condensed it, I guess, and, and

submitted it to some, some popular,

934

:

newspapers, journals, et cetera.

935

:

What's your, what's your main thesis here?

936

:

Harley Bassman: Look, Fannie and Freddie

Jenny, they were created by the government

937

:

to go and support the housing market.

938

:

If you remember the, the, the

movie, it's a wonderful life.

939

:

there's the SNL, they make

loans, to people to buy houses.

940

:

And let's say they have a hundred dollars,

they make loans for a hundred bucks.

941

:

Once they loan all the

money out, that's it.

942

:

They can't loan any more money.

943

:

What the government did was say, okay,

we're gonna securitize these loans.

944

:

So the, so the bank could take that

a hundred dollars in loans, give it a

945

:

Fannie, Freddie Ginny, they'd securitize

it, make it basically government

946

:

guaranteed bonds, sell 'em to the

market, a hundred dollars comes back to

947

:

the bank, they could lend money again.

948

:

And it's a way to go and massively

increase the available funds for housing.

949

:

Housing is 18% of the economy.

950

:

And

951

:

Adam Butler: You, you did a really

good job in your letter, Harley of,

952

:

explaining the, the public good.

953

:

The creation of Ginny and Fannie

and Freddie did in the economy.

954

:

What, what was the initial motivation for,

so you, you talked about it, but I just

955

:

wanna make it really cr really explicit

that this was policy that was, that was

956

:

brought in by the government expressly to

allow every American to own a home at the

957

:

time, was sort of the ambition, Right.

958

:

Harley Bassman: Help,

959

:

by lowering, by significantly

lowering interest rates, you

960

:

made housing more available.

961

:

Remember, nobody buys a house, okay?

962

:

A rich guy buys a house,

or they don't buy a house.

963

:

They sign up for a payment plan.

964

:

The payment plan is driven

by the price of the house.

965

:

More importantly, by the

interest rates, you bring that

966

:

rate down by two, three points.

967

:

All of a sudden, that massively changes

the ability to go buy a home because

968

:

your payments come down by a lot.

969

:

Adam Butler: Yep.

970

:

Harley Bassman: That's what Fannie

and Freddie and Ginny have done is

971

:

massively lowered it because now

people who buy these mortgage bonds,

972

:

it's government guaranteed money.

973

:

So they have no risk.

974

:

A a bank, I mean, would you, would

you take out a, would you give a

975

:

loan to your next door neighbor?

976

:

I kind of doubt it.

977

:

I mean, you charge him 15% probably.

978

:

You have no idea who this guy is.

979

:

Take it out government money.

980

:

Ah, fine.

981

:

So they radically changed the

availability of housing to do that.

982

:

They, they lowered the price

and increase the availability.

983

:

And the problem we had here was that,

Fannie Mae went public and IPO in, in 68.

984

:

and what you did was you created

this bifurcation of risk where the

985

:

stockholders got the upside and

the government got the downside.

986

:

And so what the guys at Fannie Mae

did was they said, Hey, good idea.

987

:

Let's go and juice it up.

988

:

They bought $750 billion of

their own mortgage bonds.

989

:

Hedged them out.

990

:

So they thought, took those profits and

they took a, they went into the stock

991

:

and the value of Fannie Mae went up eight

x and they got options on those stock

992

:

and they got, I mean, the CEO made $90

million over the course of six years.

993

:

Okay?

994

:

he's supposed to be a government

employee as far as I'm concerned.

995

:

He's cleared up 90 million bucks

and then financial crisis hits,

996

:

the whole thing blows up, and the

government goes and owns the bag.

997

:

this was always a bad idea.

998

:

Okay.

999

:

This is called moral hazard.

:

00:55:13,431 --> 00:55:17,061

It's classic moral hazard where the

gains and losses go different places.

:

00:55:18,501 --> 00:55:23,061

We're back to a world where the government

has the whole thing kind of sorta.

:

00:55:23,571 --> 00:55:26,991

We did conservancy as

opposed to pure bankruptcy.

:

00:55:27,081 --> 00:55:30,741

What they should have done, the reason

they didn't do it is at the time there

:

00:55:30,741 --> 00:55:35,871

was about $5 trillion of Fannie Freddie

to ventures and mortgage bonds out there.

:

00:55:36,411 --> 00:55:38,871

If the government took

it onto their books.

:

00:55:39,546 --> 00:55:45,666

Then we would've seen total national

government debt, not liabilities.

:

00:55:45,666 --> 00:55:50,826

This actual debt go from 10 trillion to

15 trillion and that would've taken the

:

00:55:50,826 --> 00:55:53,856

debt to GDP ratio from 65 to a hundred.

:

00:55:54,576 --> 00:55:58,206

And Reinhard Roff, as you know, they've

written about once you go over 90%,

:

00:55:58,476 --> 00:56:02,346

you tend to have a dulled economy,

which where we are now, we're like,

:

00:56:02,346 --> 00:56:06,756

I think we're 110, 20% right now,

which is why growth is also lousy.

:

00:56:07,106 --> 00:56:09,116

and someday we'll have to deal

with that different topic entirely.

:

00:56:09,676 --> 00:56:10,906

they should just take the thing over.

:

00:56:11,416 --> 00:56:13,996

They're thinking of re

privatizing this, like, who wins?

:

00:56:13,996 --> 00:56:17,266

I mean, there's a few guys that

own a lot of this stock and they,

:

00:56:17,476 --> 00:56:21,526

and they might make billions of

dollars for what purpose to go.

:

00:56:21,526 --> 00:56:24,406

And once again, bifurcate

the risk and return.

:

00:56:25,006 --> 00:56:29,206

The stockholders are gonna

go and I presume get money.

:

00:56:29,776 --> 00:56:32,566

They have to take, if they get,

if they earn more than treasuries,

:

00:56:32,596 --> 00:56:33,826

that means they're taking on risk.

:

00:56:34,366 --> 00:56:36,556

But the risk is the

government's risk once again.

:

00:56:36,976 --> 00:56:40,876

So, I mean, we're paying people from the

government's risk, and if we actually

:

00:56:40,876 --> 00:56:45,316

really do privatize, which we won't, but

if we really did well, those mortgage

:

00:56:45,316 --> 00:56:47,446

bonds are gonna trade to a wider spread

'cause there's more risk than them.

:

00:56:47,446 --> 00:56:47,806

Now

:

00:56:47,966 --> 00:56:48,176

Adam Butler: Yeah.

:

00:56:48,176 --> 00:56:50,996

The cost of capital to all

homeowners goes up dramatically.

:

00:56:51,616 --> 00:56:55,456

Harley Bassman: if we, we, if we only

had a quarter percent, just a quarter

:

00:56:55,456 --> 00:57:02,836

percent increase in the mortgage rate

nationally, that would take up the average

:

00:57:02,836 --> 00:57:06,046

or the median mortgage payment by $800.

:

00:57:06,676 --> 00:57:10,156

That's about people pay for Christmas

presents, man, we're gonna suck

:

00:57:10,156 --> 00:57:14,266

out, you know, Christmas cheer

and give it to a few rich guys.

:

00:57:14,296 --> 00:57:17,206

Like, this is public policy,

you know, gone upside down.

:

00:57:17,566 --> 00:57:18,466

It's a horrible idea.

:

00:57:18,506 --> 00:57:19,976

Adam Butler: statement in

your, in your original letter.

:

00:57:19,976 --> 00:57:20,726

I remember reading that.

:

00:57:21,136 --> 00:57:21,316

Harley Bassman: Yeah.

:

00:57:21,376 --> 00:57:23,266

So, I mean, I'm totally against this.

:

00:57:23,266 --> 00:57:24,196

I hope they don't do it.

:

00:57:24,376 --> 00:57:26,416

Hopefully it's, it is just talk, but

:

00:57:27,296 --> 00:57:30,146

Adam Butler: How do people still

own shares in Fannie and Freddie?

:

00:57:30,236 --> 00:57:33,686

Um, oh, they're like listed, right?

:

00:57:34,036 --> 00:57:35,986

Harley Bassman: No, they are, they

trade on their stock exchange, but

:

00:57:35,986 --> 00:57:37,666

they, they never went bankrupt.

:

00:57:37,726 --> 00:57:39,916

They traded for 25

cents, 50 cents a share.

:

00:57:40,186 --> 00:57:41,656

You know, five years ago, 10 years ago,

:

00:57:42,386 --> 00:57:45,176

Adam Butler: So what does it mean

to them to, to re privatize it if

:

00:57:45,176 --> 00:57:46,796

they're already trading private shares?

:

00:57:47,446 --> 00:57:49,636

Harley Bassman: I think, well,

the government owns most of

:

00:57:49,636 --> 00:57:51,556

these shares and the government

:

00:57:51,611 --> 00:57:53,381

Adam Butler: So there's some

small float that, that the

:

00:57:53,381 --> 00:57:54,641

government doesn't own, and they're

:

00:57:54,641 --> 00:57:55,001

gonna

:

00:57:55,156 --> 00:57:56,836

Harley Bassman: So the government

will go, yeah, so the government

:

00:57:56,836 --> 00:57:58,576

will go sell these things, fine.

:

00:57:58,576 --> 00:58:01,906

They'll go and make, you know,

$50 billion or whatever it is.

:

00:58:01,906 --> 00:58:06,466

Like, really, they're gonna do a

one shot deal of, of an amount of

:

00:58:06,466 --> 00:58:10,336

money that's, you know, they're

barber at the club and basically

:

00:58:10,336 --> 00:58:12,466

screw all the American homeowners.

:

00:58:12,496 --> 00:58:13,966

This is upside down public policy.

:

00:58:14,471 --> 00:58:16,466

Adam Butler: Well, they're

basically selling another $50

:

00:58:16,466 --> 00:58:18,491

billion put option, right?

:

00:58:19,996 --> 00:58:23,176

Harley Bassman: I suppose, but

I, it, it, it's, it, look, it's

:

00:58:23,176 --> 00:58:25,336

a bad idea in so many ways.

:

00:58:25,636 --> 00:58:29,506

I mean, look, if they really wanna do it,

then really privatize the whole thing.

:

00:58:30,331 --> 00:58:33,151

Then the buyers of the stock,

well, they're not gonna be quite

:

00:58:33,151 --> 00:58:36,151

as happy if they think that stock

is really gonna zero this time.

:

00:58:36,481 --> 00:58:37,351

But we can't do that.

:

00:58:37,351 --> 00:58:40,621

We, I mean, we just can't go

and beg the same reason why.

:

00:58:40,621 --> 00:58:44,161

When they talk about they're gonna shut

the government down, you know, in, in a

:

00:58:44,161 --> 00:58:47,131

month or so, really, they can't do that.

:

00:58:47,131 --> 00:58:49,771

I mean, you can talk and talk

and talk, but the US government

:

00:58:49,951 --> 00:58:51,211

is not going to default.

:

00:58:51,361 --> 00:58:52,741

We can't just can't.

:

00:58:53,131 --> 00:58:57,061

So it, it is just, just more talk

to go and have trading ideas.

:

00:58:57,061 --> 00:59:00,451

It, it is bothersome that we even

have this kind of conversation.

:

00:59:01,206 --> 00:59:01,496

Adam Butler: yeah.

:

00:59:01,541 --> 00:59:07,011

So what, what kind of, investors

or you know, are, are agitating for

:

00:59:07,011 --> 00:59:08,271

this privatization, do you think?

:

00:59:08,271 --> 00:59:09,321

Without naming any names?

:

00:59:10,451 --> 00:59:12,041

Harley Bassman: Look, it's

all public information.

:

00:59:12,041 --> 00:59:15,221

You just go to Bloomberg and type

it on in HDS to give you all the

:

00:59:15,221 --> 00:59:16,571

names of who, who owns the shares.

:

00:59:16,751 --> 00:59:17,411

It's real easy

:

00:59:17,991 --> 00:59:18,771

Adam Butler: Right, right.

:

00:59:18,801 --> 00:59:23,768

Obviously people with, with, with

a, a serious profit motive and, and

:

00:59:23,768 --> 00:59:29,948

without naming names, some of them

have been very public supporters of

:

00:59:29,948 --> 00:59:31,978

the, of, of the current administration.

:

00:59:31,978 --> 00:59:32,158

So

:

00:59:32,293 --> 00:59:33,348

Harley Bassman: I kind of gotta go there.

:

00:59:33,408 --> 00:59:34,248

All I'll say is this.

:

00:59:34,248 --> 00:59:38,388

You go to HDS, the top

line is 115 million shares.

:

00:59:38,808 --> 00:59:42,858

It was trading at a buck 50 before

the election, trading at 14 bucks.

:

00:59:42,858 --> 00:59:44,533

Now the math okay.

:

00:59:46,948 --> 00:59:47,278

Adam Butler: Yep.

:

00:59:47,278 --> 00:59:48,058

Say no more.

:

00:59:48,118 --> 00:59:48,628

Awesome.

:

00:59:49,018 --> 00:59:50,988

Well, I hope you find a,

someone who will print it.

:

00:59:51,018 --> 00:59:52,968

Maybe the Financial Times

will print it, like you say.

:

00:59:52,968 --> 00:59:53,598

That'd be great.

:

00:59:53,658 --> 00:59:57,328

or, you know, one of the American,

newspapers would ev be even better.

:

00:59:57,358 --> 00:59:59,215

But, let's hope it gets some publicity.

:

00:59:59,245 --> 01:00:01,765

'cause I think it's a really

important message to get out there

:

01:00:01,825 --> 01:00:02,935

and I appreciate you writing it.

:

01:00:03,485 --> 01:00:06,335

and I appreciate you sharing all

of your wisdom and, and all your

:

01:00:06,335 --> 01:00:08,825

ideas again here with me today.

:

01:00:08,825 --> 01:00:11,398

And, it's always just an

unbelievable pleasure.

:

01:00:11,578 --> 01:00:13,138

I know you're traveling

to Italy next week.

:

01:00:13,138 --> 01:00:13,258

Are you?

:

01:00:14,173 --> 01:00:14,898

Harley Bassman: Indeed I am.

:

01:00:14,898 --> 01:00:17,588

We leave on Saturday, my

third grandchild is arriving.

:

01:00:17,588 --> 01:00:21,458

Then my, daughter has a postdoc,

physics PhD in Pisa, Italy.

:

01:00:21,458 --> 01:00:24,068

She's working on quantum thermodynamics.

:

01:00:24,198 --> 01:00:26,718

and, uh, she's been there longer

than I thought she was, and she might

:

01:00:26,718 --> 01:00:27,828

be there even longer than I think.

:

01:00:28,228 --> 01:00:29,848

but, but there, she's doing very well.

:

01:00:29,848 --> 01:00:32,998

And someday you might go and see,

uh, she might start a company someday

:

01:00:32,998 --> 01:00:35,098

you'll be, be, uh, dealing with her.

:

01:00:35,768 --> 01:00:38,858

Adam Butler: That's exciting and I can't

think of a better reason to visit Italy.

:

01:00:38,908 --> 01:00:41,548

you'd want to go anyway, but to

be able to visit new grandchildren

:

01:00:41,548 --> 01:00:43,378

and spend time with family even

:

01:00:43,398 --> 01:00:47,238

Harley Bassman: I, I'll say that, that

this, everyone says, oh, Italy, Tuscany.

:

01:00:47,238 --> 01:00:47,868

It's incredible.

:

01:00:47,868 --> 01:00:48,198

Thank you.

:

01:00:48,198 --> 01:00:48,798

It's wonderful.

:

01:00:48,798 --> 01:00:49,578

I said yes.

:

01:00:49,608 --> 01:00:51,198

If you go for a week,

you're gonna love it.

:

01:00:51,198 --> 01:00:51,558

Ma'am.

:

01:00:52,038 --> 01:00:55,848

I was there for six weeks for the

first baby after about week three.

:

01:00:56,118 --> 01:00:59,208

You know, it's pizza, it's

pasta, and that's kind of it.

:

01:00:59,208 --> 01:01:02,148

Ya and sushi or Chinese or

Mexican or anything else.

:

01:01:02,148 --> 01:01:04,065

So, um, it is affordable though.

:

01:01:04,185 --> 01:01:07,335

You get a great pizza for

$8, a good pasta for $9.

:

01:01:07,335 --> 01:01:08,385

It is very affordable.

:

01:01:08,845 --> 01:01:09,715

so, so that's good.

:

01:01:09,815 --> 01:01:10,595

Adam Butler: found the same.

:

01:01:10,735 --> 01:01:12,655

Harley Bassman: six weeks is

kind, is, is a little long.

:

01:01:13,145 --> 01:01:13,505

Adam Butler: Yeah.

:

01:01:13,535 --> 01:01:16,115

We went for three weeks and found

the same that you, you end up craving

:

01:01:16,115 --> 01:01:19,025

diversity palate diversity matters a lot.

:

01:01:19,025 --> 01:01:20,465

You don't realize it until it's missing.

:

01:01:20,845 --> 01:01:21,065

Harley Bassman: Yep.

:

01:01:21,575 --> 01:01:22,055

Adam Butler: Awesome.

:

01:01:22,265 --> 01:01:23,730

Alright, well thanks again, Harley.

:

01:01:23,730 --> 01:01:24,530

Really appreciate it.

:

01:01:24,635 --> 01:01:29,548

And you know, I'm sure we'll have you

back on in a year or two to, to to reflect

:

01:01:29,548 --> 01:01:32,818

on what's happened and, and I'm sure the

environment will be completely different.

:

01:01:32,818 --> 01:01:36,858

We'll have lots wanna talk about, but

until then, save travels and, chat soon.

:

01:01:37,458 --> 01:01:37,658

Harley Bassman: Excellent.

:

01:01:37,658 --> 01:01:38,093

Thank you.

All Episodes Previous Episode

Listen for free

Show artwork for Resolve Riffs Investment Podcast

About the Podcast

Resolve Riffs Investment Podcast
Welcome to ReSolve Riffs Investment Podcast, hosted by the team at ReSolve Global*, where evidence inspires confidence.
These podcasts will dig deep to uncover investment truths and life hacks you won’t find in the mainstream media, covering topics that appeal to left-brained robots, right-brained poets and everyone in between. In this show we interview deep thinkers in the world of quantitative finance such as Larry Swedroe, Meb Faber and many more, all with the goal of helping you reach excellence. Welcome to the journey.


*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.